Companies were surprised last September with the enactment of ICMS Convention 106, which aims to regulate the procedures for collection of ICMS applied to transactions with digital goods and merchandise, traded through electronic data transfer, and grants exemption for withdrawals intended for final consumers.

Before discussing the constitutionality of the convention, it is important to point out that the discussion of the possibility of charging ICMS on software made available electronically has long been discussed by state revenue services.

In fact, the states adopt the position that all standardized software, programs, electronic games, applications, electronic files and the like, even if they have been or can be customized, are classified within the concept of merchandise. This is even the logic behind Convention No. 106/2017

In this sense, once classified as merchandise, the marketing and provision of software must follow the general rule of taxation set forth in applicable ICMS legislation.

Considering this logic, it is easy to understand why the states understood that Convention No. 106/2017 did not change the legal framework with respect to taxation of the marketing and provision of software (considering its equivalence to the merchandise). The only exception is the establishment of an exemption in transactions that precede the arrival of the merchandise to the final consumer, per the terms of the section two of the convention.

It so happens, however, that the issue requires much more discussion, in our opinion, especially because of: (i) its establishing the presumption that all transactions with software are internal; (ii) its defining the taxpayers; and (ii) its holding third parties liable without any relation with the ICMS taxable event for the collection of ICMS due on the transaction.

Specifically with respect to items "i" and "ii", the sections three and four of Convention No. 106/2017 provide that:

Section three. The tax shall be collected on internal withdrawals and on imports made through a website or electronic platform that sells or makes available, even if through periodic payment, digital goods and merchandise through electronic transfer of data, in the state where the purchaser of the digital goods or merchandise is domiciled or established.

Section four. Legal entities that own a website or an electronic platform that sells or makes available, even if through periodic payment, digital goods and merchandise through electronic transfer of data, shall be the taxpayer in the transaction and must register with the state in which they carry out the internal withdrawals or importation destined to final consumer, being offered, at the discretion of each state: (...)

From an analysis of the section transcribed above, we believe it possible to argue that Convention 106/2017 invades the jurisdiction of the complementary law by fixing not only the place of transactions for the purpose of collection but also the taxable person, in this case the taxpayer, thus violating article 155, paragraph 2, item XII, "d", of the Federal Constitution.

In this sense, it is worth remembering that, under the terms of article 155, paragraph 2, item XII, "g", of the Federal Constitution, and of article 1 of Complementary Law No. 24/1975, conventions may only govern the granting or revocation of exemptions, incentives, and tax benefits, and this type of regulation is not permitted to govern the method of collecting ICMS or determining who the taxpayer is.

In our view, the convention aims to institute a state taxation system based on the consumption of merchandise (taxation on the destination). However, due to economic and fiscal policies, these taxes are restricted to oil transactions, including lubricants, liquid and gaseous fuels derived from them, and electric energy, according to article 155, X, 'b' of the Federal Constitution.

We understand, therefore, that there are arguments supporting an allegation that Convention No. 106/2017 is unconstitutional due to its attempting to transform a so-called "interstate transaction" into an "internal transaction" without a basis in complementary law. Also because this measure would indirectly violate the jurisdiction of the Federal Senate to define the ICMS rates levied on interstate transactions with goods (under the terms of article 155, paragraph 2, IV, of the Federal Constitution).

Regarding the liability of third parties not related to the ICMS taxable event for collection of the ICMS tax due on the transaction, the Federal Constitution assigns the jurisdiction over defining components of tax rules, such as identity of the taxpayer, taxable event, obligation, among others, to complementary law.

Regarding the ICMS, the Federal Constitution, in order to guarantee greater legal certainty, assigns to complementary law various issues of the overarching rule on application of state tax, among them, the taxpayer, as already explained.

On this point, Article 128 of the National Tax Code stipulates that the law may expressly assign liability for the tax credit to third parties linked to the taxable event.

Thus, there are two requirements for assigning of tax liability, which are: (i) obligation to enact a law; and (ii) the person responsible must be related to the triggering event.

From an analysis of Convention No. 106/2017, we found in its section five an express assignment to third parties of liability for the collection of ICMS. However, in our view, there are arguments to support an allegation of illegality of the convention, in view of the absence of a law authorizing such liability.

In addition, from an analysis of the persons responsible listed in section five, it is our opinion that this link with the taxable event with the state tax is questionable, since in some cases legal entities are only responsible for the mere monetary pass-through.

Considering the above, and despite our understanding on the correct taxation of marketing and provision of software (ISS vs. ICMS), we understand that there are arguments to support an allegation that the form of collection imposed by Convention No. 106/2017 is unconstitutional.

This conclusion is corroborated by the recent injunction granted in the collective application for mandamus presented by Brasscom - Brazilian Association of Information and Communication Technology Companies, against Convention No. 106/2017.